Financials reveal what lies behind the rhetoric

There has been a lot said about the viability of media companies. Sven Lunsche analyses the financials of these listed companies to see what is really happening behind the scenes.

What do the financials of South Africa’s listed media companies tell us about the underlying state of the country’s traditional print and broadcast industry?

In answering this question, one must work on the premise that without a sound financial platform to back them, no media company can survive in the medium to long term. On that basis, a look at the most recent financial performance of the country’s six listed media firms offers a level of comfort: all of them are still making money, despite the fact that the main source of their income – advertising – has been haemorrhaging badly after three years of economic decline since the start of the financial crisis in late 2008.

But their combined profit performance has been flat – as a look at the table accompanying this story shows. The JSE media index, which tracks the performance of JSE-listed equities, reflects this: over the past 12 months, the index has barely changed and has, more recently, moved into negative territory.

Given that advertising spending is one of the most sensitive indicators of the economic cycle, it is not surprising that – with the possible exception of the nascent economic recovery towards the latter half of 2010 and early 2011 – the bottom-line performance of media companies has been stagnating of late.

A more detailed analysis of their financials, though, shows that the companies are faring differently, depending on how diversified their income base is. For the most, they are relying on a single source of income: in the case of Avusa, Independent Newspapers and Caxton, that is advertising in their print media – though the latter also has its printing presses as a growing source of revenue. African Media Entertainment (AME) and Kagiso Media rely on radio advertising for the bulk of their earnings.

The noticeable exception is Naspers, and it’s no surprise that the company is recognised globally as one of the most entrepreneurial media firms around, despite the recent volatile performance in its share price. “Naspers is still robust in terms of earnings potential and profitability. In the short term, the market is a voting machine, but in the long term, it’s a weighing machine,” investment management firm Afena Capital’s head of research, Khulekani Dlamini, told the Financial Mail recently.

Behind the vote of confidence is Naspers’ investment in digital TV, through MultiChoice/M-Net and, most importantly, some early stage investment in emerging market mobile and internet assets. The latter include some properties that have dramatically shot up in value of the past five years: Chinese internet company Tencent, Russian-based Mail.ru and even 2% of Facebook.

Combined, these assets constitute around 85% of Naspers’ market value, illustrating how poorly the market values the print operations of Naspers – despite the fact that these make up some of the prime media assets in South Africa. A look at Naspers’ own evaluation of its operations during the past financial year to end-March 2011 illustrates why.

The company writes in its financial statement for the period: “Major areas of growth were the internet and pay-television business. Worldwide the internet industry continued its expansion from which most of our internet businesses benefited. The resilience of our pay-TV operations in an increasingly competitive environment underscores the benefit of quality content.

“Our print media operations in South Africa showed revenue growth of 9% with advertising improving only modestly.” With costs rising in excess of advertising income, the trading profit for the division as a whole was down by 3%.

But at least Naspers has the internet and pay-TV to draw on. Other media companies rely almost solely on print media for their income, and have been hard hit by the decline in their consumers’ discretionary income.

The Ireland-based Independent Group certainly had a dismal 2010/11 financial year. “Underlying advertising revenue declined by 3.7% with classified advertising volumes down as activity in the recruitment and property sectors contracted. National/brand and agency retail advertising was softer than the prior year due to tougher comparatives in respect of the 2010 Soccer World Cup,” the company said in its financial statement.

However, the fact that the South African operations are still some of their most successful also makes them easy pickings for the global head office, and there has been virtually no reinvestment in the South African newspaper titles – led by The Star – in recent years. Editorial quality has undoubtedly suffered.

Similarly, the print titles in the Caxton stable have been struggling, though the last performance review of this secretive company goes as far back as calendar 2010. In it, Caxton reports: “Worldwide, certain sections of the newspaper industry are facing difficult times. In South Africa this trend is being seen mainly in the daily and Sunday newspapers and we have seen falling circulation in the broadsheet market…. With regard to the free newspaper market, the company has maintained its strong position.”

Its so-called ‘knock-and-drop’ newspapers, with their relatively low-cost base, have always been the company’s cash cow. Over the past few years this has been augmented by its printing presses, which the group has expanded significantly through new investments and acquisitions.

Avusa, with its Sowetan and Sunday Times flagship titles, benefited from the sketchy economic recovery in the year to end-March, with revenue up by 13% and headline earnings per share 18% higher. However, since then, the fortunes have flagged again, with the group issuing a warning to shareholders that earnings for the subsequent six months to end-September 2011 would be down by over 20%.

This is not surprising given that, more than other media groups, the fortunes of Avusa’s media titles as well as its Exclusive Books and Nu-Metro movie house depend on the discretionary incomes of South Africa’s middle class. These consumers remain hard hit by the flagging economy and, for the foreseeable future, Avusa will have to rely on the printing businesses of Universal Print Group and Hirt & Carter for its profits. The group acquired the Durban-based companies for R925 million in September last year.

In the electronic media space, Avusa – like many of the other companies in the field – has been playing catch-up with Naspers, despite the fact that the group possesses some of the premier content in South Africa. While its electronic data business, I-Net Bridge, continues to deliver small but solid earnings, its investment in the internet space has so far had limited impact.

This contrasts with the web initiatives by both Naspers and the Independent Group, which have pooled their brands successfully under the News24.co.za and iol.co.za banners respectively.

To add to its woes, Avusa has been going through some turbulent shareholder and management battles, with the departure of CEO Prakash Desai and three directors recently. For now, most investors are steering well clear of Avusa’s shares.

Radio remains one of the few forms of media still enjoying reasonable growth. This is reflected in the revenue performances of both Kagiso Media and AME, though they were undoubtedly affected by lower volumes amid the economic slowdown. Costs, though, were affected as both companies tried to expand their base by moving into new media arenas, particularly the web.

As a result, their profits remained largely unchanged, with low single-digit operating profit increases recorded by both firms.

Considering all the media houses, it seems clear that amid the emergence of digital media as a source of significant income, the continued reliance by most of them on single print or radio platforms appears increasingly short-sighted.

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